The Benefits of Performance-Based Budgeting

During the early months of 1998, newly appointed President Ray Ferrero Jr. and new Executive Vice President George L. Hanbury, had performed a thorough fiscal and operational review and realized that they faced a major budgeting and financial challenge if Nova Southeastern University (Fla.) was to thrive and prosper. The South Florida-based university, best known for its distance education and graduate online programs, needed more stringent fiscal discipline to ensure long term-financial health.

The university was composed of 16 entrepreneurial colleges and schools, each run almost totally autonomously and answering to central authority only in the most decentralized way. The annual budget each year was submitted to the Board of Trustees on a long spreadsheet, which compiled the projections of each of the units, some often unattainable. In essence, there was no accountability for success, failure, or meeting any financial targets. Because the university typically broke even, the prior administration felt everything was fine.

Ferrero immediately realized that barely breaking even was not acceptable and that it would take central planning and goal setting in order to unite the university and allow it to fulfill its mission into the future. A strategic plan included targeted financial goals. Hanbury quickly saw that the university's legacy financial system would not support detailed budgeting and reporting. A committee was formed and a new system selected.

A five-year plan was developed to move the university toward a goal of centralized performance-based budgeting including internal standards and external performance measurements. Soon goals would be established, from peer comparisons, generated from research of like programs at comparable institutions as well as year-over-year improvement standards.

The basis of the model Hanbury devised was initially structured off of his concept of a centralized database for all financial and student data. This was accomplished through the implementation in 1999-2001 of the SCT Banner System, which retains all business data and functions for Human Resources, Financial Operations, Financial Aid, Student and Registration, as well as Development and Endowment Management. All the modules use the same key data set throughout, eliminating the need for shadow systems in academic centers and duplication of data in the database. It helped us to streamline process workflows and to unify the university to clearly see which areas needed to be addressed. By 2002, the university was operating on all SCT Banner modules--even the course management system, WebCT was working within the new system.

The performance-based model was fully developed once Heron arrived in the summer of 2000 and it revolved around the principles of OMB Circular 133, the federal government's budgeting guidelines for allocation of higher ed grants. Initially, each school and college was budgeted, and collaborated for revenues and direct expenses at the organization and detail account code level, with a negotiated "first net" (Net1) contribution margin. Then, we allocated administration of the college back to the academic programs in each college and subtracted that from Net1 to get to Net2, (after college allocations). Finally, using the principles of the OMB Circular 133 step-down, all central administrative costs were allocated through 12 pools to the 16 academic units as follows:

The pools were stepped down in order and allocated on a monthly basis to each academic unit to determine the "third net" for each academic unit (Net3). (See schedule C)

After years of summarizing our academic schools and colleges for budgeting purposes, we have now begun to separate them into their individual academic programs. Each program rolls up separately from the others and is allocated a portion of its college's administrative costs, as well as its portion of the university indirect cost allocations. Thus, a valuable tool is created with results, which often surprise even the program directors themselves. The following is a condensed version of our budgeting timeline (Schedule D). It attempts to show the flow from start to finish of a process, which culminates with the approval from our Finance Committee and adoption by the Board of Trustees in March of each year.

Our process now begins in October when all the deans meet with their respective program directors to strategize and develop initiatives for the following fiscal year budgets. Then, in early November, the Budget Office builds a baseline for the next fiscal year's budget cycle. The values of all filled and unfilled university positions from Human Resources are included along with all dollars from a base phase in our budget module. Certain budget guidelines are established as an outcome of meetings with executive administration concerning university-wide matters such as contingencies, new position and salary increase pools, the capital equipment pool, and fringe benefit rates. Once this budget phase is complete, it is copied to a new phase where our deans and directors can make any changes they feel necessary. The deans have completed projecting enrollment, tuition rates, new initiatives, and what resources they will need to accomplish their goals for the coming fiscal year, so they are now ready to input into the Banner software.

By the end of November, the budget module is ready to be opened up to the university for input by the numerous academic schools and colleges, service areas, and administrative areas and will remain open for changes until mid January. This assures every area enough time to complete its budget. When the budget module is closed to the university, all materials are compiled and reports are generated and evaluated by executive administration.

In late January, each center is scheduled a budget hearing with the executive vice president for Administration, the vice president for Finance, and the university budget director, to discuss their budgets in detail, and they are ultimately given specific net/revenue ratio targets that they must adjust their budgets to achieve. These numbers are obtained from their performance in the current year, the previous year, and the goals for their programs, individual center, and entire university for the upcoming fiscal year.

Each area has a short timeframe in which administrators must submit changes to the Budget Office, changes that will help them achieve their financial goals. These changes are made and the budget recompiled. By the middle of February, new tuition rates have been compiled, and the presentation material for the Budget Plan continues. Spreadsheets are compiled comparing prior year actual dollars, current year projections, and new fiscal year submissions. Summaries covering highlights, new initiatives, and construction news are edited and added to the plan. Many spreadsheets and graphs are created for each academic school and college, as well as for each of their programs respectively, which become part of the final budget plan. All materials become part of the Budget Plan, a sizeable book distributed to the members of the Finance Committee and the entire Board of Trustees.

Finally the last item of comparison is developed and added to the Budget Plan. Each school and college is asked to identify four or five schools within and outside Florida to which they wish to be compared. Sometimes, they also add a school that they "aspire to emulate." They then help develop benchmark statistics, which they wish to be compared against, and they in turn, aid the budget office in acquiring the comparable statistics from the identified peer schools. These peer comparisons are also included in the budget presentation to the Board of Directors. (See Schedule E)

Through the innovative thinking of our president, executive vice president, VP for finance, and university budget director, and the hard work and assistance of each our deans, academic program directors, and administrative vice presidents, Nova Southeastern University has grown to become the seventh-largest private institution in the United States, according to the national enrollment survey of the International Center for Educational Statistics. We are fiscally strong, have added many new campus buildings and opened student education centers in many new locations.

After five years of negotiations, adjustments, and readjustments, we can clearly demonstrate that performance-based methods that are carried out systematically and consistently applied do work. As shown in Examples 1 and 2 of Schedule F, our "first net" has improved from an average of 25.75 percent to 34.08 percent in this short timeframe and Net3 (after all allocations) has gone from a negative 8.43 percent to a positive 6.19 percent. Continuing education is critical and partnership with divisional business managers is a must. This work represents great success for our management team and for our university.

W. David Heron is the vice president of Finance at Nova Southeastern University and Virginia C. Corbyons is the university budget director.